Disappointing forecast: Hungarian economy will only falter in the next few years

We can close the gap very deep this year

The performance of the Hungarian economy could fall by 5.7% this year, OECD economists believe in their estimate published Tuesday. This is significantly better than the June estimate, when an optimistic and pessimistic scenario was expected and even the former projected an 8% drop in GDP in Hungary.

The details of the analysis also show that in particular, consumption may perform better than expected this yearand investment may fall less than expected. In contrast, the performance of foreign trade could be significantly worse due to the global crisis.

Parallel to the small decline this year, the recovery may be much longer. According to OECD estimates, the Hungarian economy may grow by only 2.6% in 2021 and growth is expected to accelerate to only 3.2% by 2022.. The organization’s experts note that restrictive measures taken due to the second wave of the coronavirus epidemic could significantly slow down the recovery.

According to the OECD, the impact of the second wave of the epidemic is clearly felt, the recovery has stalled, demand growth has stalled, and industrial production recovered rapidly after the first wave in the spring, but it was still below pre-epidemic levels in September. According to the organization’s model, with the new restrictive measures taken in the second wave, the Hungarian economy may escape the fourth quarter with a contraction of around 1 percent.

Government action, wage subsidies and housing subsidies are also expected to make a major contribution to the recovery in 2021. And if effective vaccines are available, both consumption and external demand can slowly recover. According to the OECD, the downside risk is that the restrictions will have to last longer than expected, and the recession in the international automotive industry will continue, which could last until 2022. On the other hand, a faster recovery than expected it could represent a positive change from the forecast.

The budget deficit can definitely disappear

Perhaps the most surprising element of the OECD forecast is that after this year’s budget deficit of 8.8% of GDP, a deficit of 7.5% is expected even next year, and a deficit of 6% is also projected by 2022. When looking at public spending, it is not surprising that the OECD has such a high deficit trajectory. The government’s plans for next year are not yet known (the 2021 vision has been rewritten many times for life), but signs have already been made that the deficit will only gradually return to the acceptably low band.

Of course, a more lasting increase in the budget deficit may not be negative, and the organization’s economists point out that the economy should support fiscal policy until the recovery is really on track.

In other words, the deficit that has been running for years may be the consequence of a significantly delayed recovery compared to optimistic expectations.

Among the proposed measures, the OECD highlights that, instead of comprehensive support for the labor market, more specific measures would be needed in the sectors most affected by the crisis, such as tourism and hospitality. In addition, they highlight what has been said for years that the three-month period of unemployment benefits in Hungary is too short, increasing it could improve labor mobility. In the longer term, significant competitiveness reforms could strengthen the economic recovery, including investment in infrastructure and more competitive production.

Overall, according to the OECD, the recovery of the Hungarian economy may be significantly slower than optimistic expectations, and full recovery may take years. Partly for this reason, budget support may be needed on a long-term basis, that is, the deficit may remain high for years to come. As a result of the two processes (prolonged recovery, persistently high deficit), the debt ratio may also increase permanently in the coming years, according to the organization.

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